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NEW DELHI: The Rs 10,000-crore follow on fund offer (FFO) of CPSE ETF will open for retail investors on Friday. While investors usually show caution in picking PSU stocks, CPSE ETF offerings have seen overwhelming response ever since the new fund offer (NFO) hit the Street in March 2014.

In the sixth such offering, a 3 per cent discount is offered to small investors. Analysts said short term investors can make some tactical allocation, but long-term investments in the ETF of PSU stocks that has high sectoral concentration risk makes no sense.

Pricing, valuations & discounts to investors

Retail investors can participate in the ETF FFO investing a minimum of Rs 5,000 and in multiples of Re 1 thereafter. A discount of 3 per cent will be offered to small investors on the FFO reference market price of the underlying Nifty CPSE index shares. The FFO allotment price would be equal to 1/100th of Nifty CPSE index, post adjusting of discount.

Valuations and high dividend yields work in favour of CPSE ETF, said Anil Rego, CEO and founder at Right Horizons.

“On the flip side, the ETF has a high-concentration in the energy space. The 3 per cent discount is also lower than the ones offered in previous FFOs. Even if you have a preference for energy PSUs, it would be wise to go stock-specific rather than picking the whole basket.”

Rego said the ETF is only for risk-taking investors who have a positive outlook on energy and power sectors.

HDFC Securities said that investors could look to encash the benefit in the first 3-6 months of allotment, provided the market is conducive for profit taking. “Short-term investors have done well in the past two issues,” it noted.

"CPSE ETF is proposed in Budget as a new tax saving option under Section 80C, but it is yet to be ratified to become a law. Till the time that happens, normal equity taxation applies," said Kamal Bansal, Institutional Head, at Bonanza Portfolio.

Jairaj Purandare, Chairman at JMP Advisors noted that investments in ELSS schemes qualify for tax deduction within the overall limit of Rs 1,50,000 under section 80C. These investments are locked in for 3 years and from 1 April 2018, long term capital gains exceeding Rs 100,000 on redemption are taxed at 10 per cent without indexation benefit.

"Similar provisions may be expected in respect of ETFs in CPSEs," he said.

For short term retail investors, who subscribe to the issue purely for discounts, no such benefit will be at disposal.
Underlying index at deep discounts

The RoE of CPSE Basket is almost the same as Nifty50’s, even as valuations are at a steep-discount of 34-46 per cent. The index has relatively lower correlation ranging from 0.57 to 0.68 vis-à-vis Nifty 50 index over one- and five-year periods, offering some divarication.

Vishal Jain, Reliance Nippon Life AMC said: “If you look at CPSE ETF index, it trades at about 8-8.5 PE compared to Nifty’s 15 PE. But the return on equity is very similar. Also add to that the dividend yield of these PSU companies is substantial at 5 per cent as compared to just 1.25 per cent for the Nifty. To top it all, the government also gives a discount in every tranche. The issue has everything in it for investors.”

Long term value creation possible?

The CPSE ETF has delivered 16.57 per cent return in the last six months against Nifty TRI’s (Total return index) 9.20 per cent. However, in the last one and three years the index has underperformed Nifty TRI by 0.75 per cent and 3.13 per cent, respectively. Besides, analysts argue that a low PE does not always mean attractive valuations.

“A total congruence and alignment of interests of shareholders and promoters is a must to create long-term shareholder value. But such a relationship is often missing when the ownership rests with the government” said Ajay Bodke of Prabhudas Lilladher.

“Lack of competitive impulses, slow and ponderous decision making, lack of customer-centricity in operations, sluggish product-and-service offerings, and slow acceptance of technology is making public-sector entities lose their market share across the industries,” Bodke said, adding that he always remain cautious before allocating capital to PSUs.

Investors looking to take benefit of the upfront discount offered, market scenarios and particularly of concerned sectors may look at CPSE ETF for tactical allocation, but it should not be looked at as a long-term investment in one’s portfolio, Bansal of Bonanza Portfolio said.